Bitcoin: Destined for Greatness, or Doomed by Its Impracticality?

January 18, 2018

In response to the guest infographic, 67 Insane Facts About Bitcoin, reader Marty J wrote, “it is my understanding that each transaction takes hours to process on the block-chain (unless one pays a $30 premium to get to the head of the line) and uses an enormous amount of electricity. With these constraints, I can’t see myself ever really using bitcoin as a currency. So if it is simply an investment, it appears to be a classic bubble–gaining value only on the dreams of the most recent buyers.” Marty raises some interesting points worth diving into.

I can’t see myself ever really using bitcoin as a currency. So if it is simply an investment, it appears to be a classic bubble–gaining value only on the dreams of the most recent buyers.

Bitcoin’s Transaction Times

In the age of instant transactions via credit card, PayPal, and even Facebook, a transaction that takes any longer than a minute would raise eyebrows. And a few hours? This sounds like stone age technology. So just how long does a Bitcoin transaction take? Unfortunately, it’s complicated. Bitcoin transactions are added to the blockchain by miners in a random order, but typically blocks take roughly 10 minutes to add to the blockchain.

Things get even more complicated because blocks are not necessarily permanent. Occasionally blocks are added that conflict with each other and one get’s kicked out of the blockchain, or is ‘orphaned,’ consequently reversing the transaction. On even more rare occasions, multiple blocks in a row are orphaned. However, this only happens to the last block or blocks in the blockchain, and the further a transaction gets buried, the less likely it is that it will be reversed. Theoretically, any transaction can be reversed, but most people agree that once a transaction is 6 blocks deep it is statistically impossible for this to happen.

So how does this all relate to transaction time? While a transaction may go through right away, the longer you wait, the more secure that transaction becomes. Waiting til it’s 6 blocks deep would indeed take approximately an hour, as Marty suggested. Or you can accept the possibility of your transaction being reversed in exchange for a faster transaction.

Bitcoin’s Transaction Costs

If you have no problem waiting several hours for a transaction to clear, you can get away with little to no transaction cost. However, to expedite your payment being included in the block-chain, you can attach a transaction fee to your payment, which would go to the first ‘miner’ who processes your transaction. Obviously, most miners will select transactions with the highest payments, creating an auction environment, similar to stock or commodity markets, where the going price can fluctuate significantly. In a single week, the average transaction price can bounce from a few dollars to well over $20. And as Marty suggested, prices have been hitting the $30 mark recently.

Unless you are moving extremely large amounts of money in each transaction, $20-$30 transaction fees are indeed completely impractical. I shy away from ATM’s for their $3 fee, so there’s no way I’ll pay ten times that for a transaction.

Bitcoin’s Investment-worthiness

So we can probably conclude that at least for the moment, in most scenarios, Bitcoin doesn’t make for a great currency. But does it make a good investment? After all, people are making money hand over foot, doubling their money in months! Unfortunately, if something seems too good to be true, it usually is. And it seems to be the case with Bitcoin too. Bitcoin has indeed seen some incredible runs, up 1400% in 2017. However, Bitcoin has seen equally fast price drops, with people losing the majority of their investments by timing the market wrong. In fact, as of this posting, Bitcoin has lost half its value in just one month!

Such volatility alone makes Bitcoin too risky of an investment for most people. But volatility aside, the question of long term price gains also remains. That the recent price surges are bubbles driven primarily by speculation seems obvious. But what will the long term trend look like? Even if you can ride out the volatility, there’s little reason to be convinced that Bitcoin will be worth any more 10 or 20 years from now than it is. This is in contrast to stock and bond markets which represent companies and securities that do in fact create underlying value and over the long term have always returned a yield to their investors.

Bitcoin’s Future: In Question

So for now, I agree with Marty that Bitcoin does indeed make for both a bad currency and a bad investment. But what about the future? While I personally don’t think Bitcoin will ever make for a great investment, there are technical changes being suggested that would make transactions more efficient. Many also speculate that if Bitcoin’s price rises high enough, its fluctuation’s will become insignificant, allowing it to stand a better chance of being used as an actual currency. However, those are a lot of ifs. And while I am certainly convinced that digital transactions will only continue to become more commonplace, for now, I think most of those will continue to be conducted in Dollars, Euros, and other centralized, traditional currencies.

But what do you think? Are you buying Bitcoin? Do you think you can time the market and strike it rich? Or do you think that with time it will make for a good currency, good investment or both? Or perhaps another crypto-currency? Or is it all speculation and foolhardy?

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While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.